Alibaba faces a reckoning with its once-vaunted “new retail” strategy.

In 2017, the term “new retail” began appearing in Alibaba’s earnings reports. Coined by the Chinese e-commerce giant, the term “new retail” refers to the seamless integration of online and offline retail. Six years later, Alibaba is having a moment of reckoning with that strategy as it looks to divest some of its offline retail assets.

During a recent quarterly earnings call, Alibaba CEO Joe Tsai revealed that the company has formed a capital management committee to work on divesting “non-core” assets, including several physical retail businesses.

“(It) makes sense for us to exit these businesses, but it will take some time given the difficult market conditions, but we will continue to work on it,” Tsai said on the call.

Just before Alibaba’s earnings release, Reuters reported that the e-commerce company is looking to sell its technology-based grocery brand Freshippo and RT-Mart, a 26-year-old supermarket chain. According to Tsai, nine months into fiscal 2024, Alibaba has completed $1.7 billion in non-core investments.

The development marks a departure from Alibaba’s once-praised new retail strategy. “E-commerce,” says Alibaba’s 2017 annual report, will replace new retail in which “the distinction between online and offline retail will become obsolete.” The report states:

The biggest trend we are seeing is the integration of offline and online retail to create a new, new retail experience where interactions between consumer traffic, inventory location and retail space are transformed through the use of big data and mobile internet technologies. For example, consumers can place orders on their mobile phones while shopping and trying products in a physical store, using location-based recommendations. We believe we will play a key role in this transformation, leveraging our consumer scale, data and technology capabilities to enhance consumer experiences and drive performance across the value chain.

Alibaba had been working on this mission for about six years, hoping that one day it would have to make a significant dent in the offline economy because it had the consumer data and technology necessary to improve brick-and-mortar retail.

In 2016, the online company entered the retail market by opening the Freshippo supermarket chain, which features self-service checkouts with face payments and conveyor belts that move goods throughout the premises. Users can place orders online through the app, which displays products based on purchase history. Payments are, not surprisingly, settled through Alibaba’s affiliated fintech platform, Alipay. Alibaba’s algorithms then calculate the most efficient route for its network of logistics workers to deliver orders, which typically arrive within 30 minutes to customers living within a 3-kilometer radius of the Freshippo location.

Alibaba continued to build its offline retail empire by partnering with third-party players. In 2017, he invested $2.88 billion in Sun Art, the owner of the RT-Mart chain; it then put up another $3.6 billion in 2020, giving it a 72% controlling stake in the supermarket operator.

Physical retail space has proven to be a slaughterhouse in China. Three years of disruption from the Covid-19 pandemic, coupled with the rise of low-cost e-commerce goods, has led to a decline in offline spending. A focus on “in-store experiences” (like Muji and Ikea) has done little to revive personal shopping as Chinese consumers tighten their belts amid the ongoing economic downturn. Retail operators are grappling with increasingly price-sensitive consumers while struggling with persistently high rental rates.

Alibaba is currently making a strategic pivot and refocusing on its core businesses of e-commerce and cloud computing. The move is necessary – and urgent – in light of the meteoric rise of its biggest rival, PDD. With its Pinduoduo offering platform in China and Temu for overseas users, PDD is getting closer to Alibaba’s dominance in the Chinese e-commerce space.

“We have concluded that to maintain our competitive advantage, we must increase investment in core capabilities and take a more aggressive approach to competition to ensure growth,” Alibaba CEO Eddie Wu said on its latest earnings call. New trade is apparently no longer one of the giant’s key growth factors.